Ever wanted to know what causes a major investment bank to go belly-up?

On January 29, 2008, Lehman Brothers Holdings Inc. (“LBHI”) reported record revenues of nearly $60 billion and record earnings in excess of $4 billion for its fiscal year ending November 30, 2007. During January 2008, Lehman’s stock traded as high as $65.73 per share and averaged in the high to mid‐fifties, implying a market capitalization of over $30 billion. Less than eight months later, on September 12, 2008, Lehman’s stock closed under $4, a decline of nearly 95% from its January 2008 value. On September 15, 2008, LBHI sought Chapter 11 protection, in the largest bankruptcy proceeding ever filed.

There are many reasons Lehman failed, and the responsibility is shared. Lehman was more the consequence than the cause of a deteriorating economic climate. Lehman’s financial plight, and the consequences to Lehman’s creditors and shareholders, was exacerbated by Lehman executives, whose conduct ranged from serious but non‐culpable errors of business judgment to actionable balance sheet manipulation; by the investment bank business model, which rewarded excessive risk taking and leverage; and by Government agencies, who by their own admission might better have anticipated or mitigated the outcome.

The report goes on to blame other banks, specifically Citigroup and JPMorgan Chase, with “colorable actions” (meaning that Lehman bond and shareholders and other adversely affected parties may now start lining up in court)

… in connection with modifications of guaranty agreements and demands for collateral in the final days of Lehman’s existence. The demands for collateral by Lehman’s Lenders had direct impact on Lehman’s liquidity pool; Lehman’s available liquidity is central to the question of why Lehman failed.

So, essentially, Lehman owed Citi and Chase money; and Citi and Chase demanded that loans be modified and/or that Lehman provide the banks with increased collateral backing the loans to protect themselves, in the process, driving Lehman out of business. Presumably the “colorable actions” will depend on whether these loan modifications and collateral demands will be found abusive or predatory. Clearly, the examiner who wrote the report feels that they are, but it is ultimately up to the courts to decide.

Now, I haven’t read the entire 2200 page report … just the Introduction and Executive Summary, but it many ways, it reads like a thriller … it will be interesting to see how this plays out over the next few months/years.